Multifamily N Illinois

Spring weather brings swirling winds to apartment market

Spring weather brings swirling winds to apartment market,ph01

In a recent letter to Berkshire Hathaway shareholders, Charlie Munger penned that the company’s future leaders would likely be unable to generate the type of returns he and Warren Buffet delivered.  He argued that it wasn’t because their future managers wouldn’t be as talented, but rather because, “It doesn’t matter how good of a fisherman someone is, if the pond is fished-out or if there are already 200 lines cast in the water, it’s really hard to catch a big fish.”

Charlie and Warren often provide this plain Midwestern wisdom.  And while managing investors’ expectations might play a role, his comments have continued to stick with me.  Berkshire Hathaway is armed with a war chest of $100 billion, the ability to deploy capital globally and a capacity to invest across numerous industries.  But even this juggernaut is lamenting the unprecedented amount of competing capital seeking a home, as well as their future expectations of yield. 

I thought about Charlie’s forecast in the context of Chicago’s apartment market.  The demand for multi-family investments is greater than during any point in my 30-year career.  It isn’t uncommon for properties we have for sale to receive requests for 30 or 40 tours, resulting in half that number of offers.  The result of so many buyers casting lines into the market is that yields have compressed. 

Combined with the abrupt and early end to this past fall’s leasing season, it felt to many like the winds of change were beginning to blow.  After all, we’re nearly eight years into a cycle that could only be described as the Golden Age of Apartments.  Certainly, some tempering is to be expected. 

But just when we thought the apartment market had hit a storm front, it seemed like the wind direction shifted again and over the winter Washington delivered a tax reform bill that stimulated the economy and provided optimism to investors.  Although the long-term effects of this tax change are still unclear, job growth, corporate earnings and new household formation are all trending in a positive direction. 

But just as quickly as you can say inflation, the Fed increased interest rates by about 75 basis points in recent months, with several more increases expected this year.  Many expected that this rate increase would correlate with a cap rate expansion.  But surprising to everyone, except perhaps Charlie, cap rates and prices have held firm, resulting in yields compressing further, only adding to the difficulty of identifying which way the winds are blowing.  

Like Chicago’s weather, investor attitudes can shift every 15 minutes.  The introduction and traction of Illinois House Bill 2430 to lift a state ban on rent control has produced a sobering effect despite beingpolitically popular.   

And along those lines, uncertainty from both Springfield and Washington has fueled volatility, as reflected in the CBOE VIX index.  Subtract upward pressure on property taxes; unfunded State pension liabilities, threats from new construction; and changing population trends.  Then add a surprisingly buoyant spring rental market, continued downtown corporate migration and a continuing investor preference for the multifamily space.  The result is a vortex that makes charting a course and setting sails seem like a daunting task.    


While these swirling market dynamics can appear confusing, it’s important to point out that this is nothing new.  Looking back over the past 30 years, the market has regularly felt the turbulence from events such as wars, tax reform, recessions, great recessions, condo conversions, condo deconversions and political policies outside investors’ control.

While not a failsafe, I believe for the multifamily investor there is one set of data that may provide comfort from these winds: demographics.  Much has been written about the 76 million strong Baby Boom (age 54 - 74) population and how it changed the economy at every life stage.  However, the cohort that has most shaped the multi-family rental market in recent years is the Millennial or Gen Y (age 20 to 37) cohort with a similar impactful population of 76 million.  Following right behind is the Gen Z’s (age 2 o 19) with an 80+ million population that is now the largest cohort in the country, representing 26 percent of the U.S. population.

Unlike the dynamics that adversely affect other real estate sectors, the short, mid- and long-term demand for rental housing appear strong.  And as far as the constantly swirling winds, Chicago’s famous writer Nelson Algren perhaps described it best when he said, “Chicago is an October sort of city, even in spring.”             

Douglas Imber is co-founder and President of Essex Realty Group, Inc. He has been involved in more than $1 billion of investment real estate transactions throughout his 28-year career and has represented many of Chicago's most prominent real estate companies and lending institutions. In addition, Doug is the general partner of more than 4,000 apartment units across the United States. Reach him directly at